15.2 Static And Flexible Budget Variance Flashcards
A major disadvantage of a static budget is that
A. It is more difficult to develop than a flexible budget
B. It is made for only one level of activity
C. Variances tend to be smaller than when flexible budgeting is used.
D. Variances are more difficult to compute than when flexible budgeting is used
B. It is made for only one level of activity
Static budgets are prepared based on the best estimates for output to be produced and costs to be incurred before the period begins. If there are any variations in conditions actually experienced, the static budget is unhelpful for diagnosing specific problem areas since it only reflects one level of activity.
When preparing a performance report for a cost center using flexible budgeting techniques, the planned cost column should be based on the
A. Budgeted amount in the original budget prepared before the beginning of the year.
B. Actual amount for the same period in the preceding year.
C. Budget adjusted to the actual level of activity for the period being reported.
D. Budget adjusted to the planned level of activity for the period being reported.
C. Budget adjusted to the actual level of activity for the period being reported.
If a report is to be used for performance evaluation, the planned cost column should be based on the actual level of activity for the period. The ability to adjust amounts for varying activity levels is the primary advantage of flexible budgeting.
A construction company has an annual master budget that shows straight-line depreciation expense of $516,000 for the year. The master budget shows a production volume of 206,400 units, and production is expected to occur uniformly throughout the year. The capacity for the facility is 215,000 units. During February, the company produced 16,340 units of product and actual depreciation expense recorded was $40,500. The company controls manufacturing costs with a flexible budget. The flexible budget amount for depreciation expense for March would be
A. $43,000
B. $40,500
C. $40,850
D. $39,216
A. $43,000
A flexible budget adjusts for changes in the volume of activity. The company expects to make 206,400 units throughout the whole year and expects a depreciation expense of $516,000 for the year. First, the expected number of units to be produced in March must be determined. Since production is expected to occur uniformly throughout the year, expected production for March is 17,200 (206,400 units / 12 months).
Next, dividing the expected depreciation expense for the year by the number of units expected to be produced during the year yields a depreciation expense of $2.50 per unit produced ($516,000 / 206,400 units).
Finally, the flexible budget amount of depreciation expense for March is $43,000 (2.50 budgeted depreciation expense per unit x 17,200 expected unit to be produced in March).
A company operates 10 offices. In the prior year, the total cost of operating the offices was $1,000,000, of which $140,000 consisted of fixed costs. All else remaining equal, what will be the budgeted costs if the company were to operate 12 offices?
A. $1,032,000
B. $1,200,000
C. $1,028,000
D. $1,172,000
D. $1,172,000
- Variable costs: $860,000 (Total costs - fixed costs)
- Variable cost per office: $86,000
Therefore, the variable cost of operating 12 offices is $1,032,000. To find the total cost of operating 12 offices, the fixed costs must be added back, resulting in $1,172,000.
An advantage of using a flexible budget compared to a static budget is that, in a flexible budget,
A. Shortfalls in planned production are clearly presented
B. Budgeted costs for a given output level can be compared with actual costs for the same level of output
C. Fixed cost variances are more clearly presented
D. Standards can easily be changed to adjust to changing circumstances
B. Budgeted costs for a given output level can be compared with actual costs for the same level of output.
The actual level of production for a period is rarely identical to the level that was projected when the period was being planned. Flexible budgets use standard costs to report what costs “should” have been incurred given the actual level of production achieved.
A plan that is created using budgeted revenue and costs but is based on the actual units of output is known as a
A. Static budget
B. Flexible budget
C. Continuous budget
D. Strategic plan
B. Flexible budget
A flexible budget is a series of several budgets prepared for many levels of sales and production. A flexible budget is designed to allow adjustment of the budget to the actual level of activity before comparing the budget activity with actual results.
A static budget
A. Drops the current month or quarter and adds a future months or a future quarter as the current month or quarter is completed
B. Presents a statement of expectations for a period but does not present a firm commitment
C. Presents the plan for only one level of activity and does not adjust to changes in the level of activity
D. Presents the plan for a range of activity so that the plan can be adjusted for changes in activity
C. Presents the plan for only one level of activity and does not adjust to changes in the level of activity.
A static budget plans for only one level of activity and does not provide for changed levels of activity.
Comparing actual results with a budget based on achieved volume is possible with the use of a
A. Monthly budget.
B. Flexible budget.
C. Rolling budget.
D. Master budget.
B. Flexible budget.
A flexible budget is essentially a series of several budgets prepared for various levels of sales and production. At the end of the period, management can compare actual costs or performance with the appropriate budgeted level in the flexible budget. A flexible budget is designed to allow adjustment of the budget to the actual level of activity before comparing the budgeted activity with actual results.
Nash Glassworks Company has budgeted fixed manufacturing overhead of $100,000 per month. The company uses absorption costing for both external and internal financial reporting purposes. Budgeted overhead rates for cost allocations for the month of April using alternative unit output denominator levels are shown in the next column.
Theoretical
- Budgeted Denominator Level (units of output): 1,500,000
- Budgeted Overhead Cost Rate: $.0667
Practical
- Budgeted Denominator Level (units of output): 1,250,000
- Budgeted Overhead Cost Rate: $.0800
Normal
- Budgeted Denominator Level (units of output): 775,000
- Budgeted Overhead Cost Rate: 0.1290
Master-budget
- Budgeted Denominator Level (units of output): 800,000
- Budgeted Overhead Cost Rate: 0.1250
Actual output for the month of April was 800,000 units of glassware.
The choice of a production volume level as a denominator in the computation of fixed overhead rates can significantly affect reported net income. Which one of the following statements is true for Nash Glassworks Company if its beginning inventory is zero, production exceeded sales, and variances are adjustments to cost of goods sold? The choice of
A. Practical capacity as the denominator level will result in a lower net income amount than if master-budget capacity is chosen.
B. Normal capacity as the denominator level will result in a lower net income amount than if any other capacity volume is chosen.
C. Practical capacity as the denominator level will result in a higher net income amount than if normal capacity is chosen.
D. Master-budget capacity as the denominator level will result in a lower net income amount than if theoretical capacity is chosen.
A. Practical capacity as the denominator level will result in a lower net income amount than if master-budget capacity is chosen.
The choice of practical rather than master budget capacity as the denominator level will result in a lower absorption costing net income. Practical capacity is the maximum level at which output is produced efficiently, with an allowance for unavoidable interruptions, for example, for holidays and scheduled maintenance. Because this level will be higher than master-budget (expected) capacity, its use will usually result in the underapplication of fixed overhead.
For example, given costs of $100,000 and master-budget capacity of 800,000 units, $.125 per unit is the application rate. If practical capacity is 1,250,000 units, the application rate is $.08 per unit. If actual production is 800,000 units, fixed overhead will not be over- or underapplied given the use of master-budget capacity.
However, there will be $36,000 (450,000 units x $.08) of underapplied fixed overhead if practical capacity is the denominator level. Consequently, given that the beginning inventory is zero and that production exceeded sales, less fixed overhead will be inventoried at the lower practical capacity rate than at the master-budget rate. Thus, master-budget net income will be greater.
Due to an unexpected road construction project, traffic passing by a restaurant has significantly increased. As a result, restaurant volume has similarly increased well beyond the level expected. Which type of budget would be most appropriate in helping the restaurant manager plan for restaurant labor costs?
A. Zero-based budget.
B. Activity-based budget.
C. Rolling budget.
D. Flexible budget.
D. Flexible budget.
A flexible budget is adaptable to unanticipated levels of production. Flexible budgeting enables an organization to compute the levels of cost that “should” have been incurred given the level of output actually achieved.
